Overstock.com Inc (NASDAQ:OSTK) has become one of the most volatile battleground stocks in the market. OSTK stock traded just above $17 after its second-quarter earnings report in early August. By early January, it neared $90, rising over 400%. And in less than two months, Overstock has pulled back 36%.
Several points of that decline came on Thursday, after the company disclosed a probe from the U.S. Securities and Exchange Commission (SEC). The SEC is focused on the company’s initial coin offering (ICO) of its tZERO unit — designed to provide a secure platform for security tokens going forward.
The news will serve only to harden the battle over OSTK stock. And with Q4 earnings due at some point in the next two weeks — though Overstock hasn’t yet announced when — more big news is on the way.
So is more volatility. The options market already is pricing in about a 46% move in OSTK over just the next six-plus months. As crazy as that sounds, that kind of move could be on the way in the next six-plus weeks.
SEC Probe and Overstock
The news of the SEC probe can be — and already has been — spun as good news by both bulls and bears. To bulls, the SEC’s action is a positive for Overstock’s tZERO platform.
After all, the whole point of tZERO is that it creates an SEC-approved platform for ICOs. It focuses on “security tokens” — not the “utility tokens” used by many other issuers, which could potentially run afoul of regulators. The business plan for tZERO from the jump has been to go “by the book.” There’s no reason to be concerned because the company has nothing to hide.
Meanwhile, the SEC, according to the Wall Street Journal, has issued “dozens of subpoenas and information requests” in the cryptocurrency market. The agency isn’t targeting tZERO; it’s targeting the whole space. And that’s a good thing for a platform whose mission statement is based on being above board and meeting regulatory standards. The SEC, in the bullish interpretation, can clear the field of the unsavory operators, making more room for tZERO’s regulated model.
Obviously, given the 5%+ decline in OSTK stock on Thursday, not everyone sees in that way. It’s perhaps discomfiting that Overstock buried the news deep in an 8-K filing. Some investors still question whether the ICO process will gain regulatory traction at all. CEO Patrick Byrne, himself no wallflower when it comes to speaking publicly, hasn’t spoken to the news yet. And there is a concern that the investigation — whatever form it takes — could disrupt tZERO’s own ICO.
That offering, as of February 23, has sold just $64.4 million in tokens, according to an SEC filing. That’s still well short of the $250 million target and at a time far later than Byrne himself predicted back in January.
Overall, it’s unlikely that the probe changes the long-term case for tZERO all that much — unless there’s something we don’t know. At the moment, however, investors may have other worries as well.
Where Are Overstock Earnings?
A year ago, Overstock reported Q4 earnings on January 31. So far, there’s been no release — and no scheduling of a release.
There are a number of reasons as to why that could be. On the Q3 conference call in November, Byrne floated the idea of selling the legacy Overstock e-commerce business, saying “there is a non-negligible possibility that this our last earnings call together.” If a sale is in the works, Overstock could be waiting until that deal is finalized.
Conversely, Byrne said in an interview last month that tZERO was targeting a “couple of companies we would like to buy.” It’s possible the earnings report could be delayed for those deals to close.
The more concerning possibility is that there’s an issue with the financials themselves. Overstock has a checkered history in terms of its accounting: It had to restate its financials three times in three years. It’s possible there may be some discussion over the accounting required for tZERO and/or Overstock’s other subsidiaries.
Whatever the cause, Overstock’s deadline is coming up. As an “accelerated” filer, per its last 10-K, the company has to release its 2017 10-K by March 16 — or file for an extension. If that extension comes, even for benign reasons, it’s likely the market will not react kindly.
Is Overstock a Buy?
I argued back in January that OSTK, then trading around $70, looked overvalued. Back at $58, it does look a bit more intriguing. I thought Byrne’s post-Q3 commentary about the operating business — barely profitable in an intensely competitive space — made a good case for value beyond the ICO efforts. A price-to-sales multiple below 1x isn’t particularly onerous, either.
But I’m simply not sold on the ICO efforts, or Byrne’s plans to build a stock-lending business. Meanwhile, Circle, backed by Goldman Sachs Group Inc (NYSE:GS), among others, recently acquired exchange Poloniex, creating a potentially tough competitor for tZERO. Byrne could be right about the blockchain; that doesn’t mean tZERO will be a success.
Its chances no doubt are better than some of the flimsier blockchain plays like Eastman Kodak Company (NYSE:KODK), Riot Blockchain Inc (NASDAQ:RIOT), or even Longfin Corp (NASDAQ:LFIN). But there’s still a long way to go for tZERO — and for Overstock.
All told, for my taste — and other investors may see it differently — there’s simply too much uncertainty at play right now, and a rather ugly chart. Overstock has a big couple of weeks coming up and I plan to spend those weeks on the sidelines.
Once it all shakes out, however, there could be an intriguing long — or short — case for OSTK stock.
As of this writing, Vince Martin has no positions in any securities mentioned.